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Keeping up with the Joneses and optimal diversification

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  • Levy, Moshe
  • Levy, Haim

Abstract

Peer-effects have been shown to affect behavior, and can generally lead to investments choices that are mean–variance inefficient. This paper analyzes optimal diversification with peer-effects. We show that if individuals have keeping-up with the Joneses preferences and they take their peer-group reference as the market portfolio, Markowitz’s mean–variance efficiency analysis and the CAPM equilibrium are intact. This holds for any keeping-up preferences, as well as heterogeneous combinations of such preferences. These results also extend to the Merton–Levy segmented-market model.

Suggested Citation

  • Levy, Moshe & Levy, Haim, 2015. "Keeping up with the Joneses and optimal diversification," Journal of Banking & Finance, Elsevier, vol. 58(C), pages 29-38.
  • Handle: RePEc:eee:jbfina:v:58:y:2015:i:c:p:29-38
    DOI: 10.1016/j.jbankfin.2015.04.012
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    More about this item

    Keywords

    Diversification; Mean–variance efficiency analysis; Peer-effects; Keeping-up with the Joneses; Correlation loving; Capital Asset Pricing Model (CAPM); Stochastic dominance;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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